Here are 4 great ways to completely waste your tax refund

We’re only a few months removed from the 2023 tax filing dates for many types of business structures, so it may seem strange to talk about business tax refunds.

However, if you think about it, this is a great time. You may still be mulling over what to do with yours. Or you may already have some regrets about how they were spent.

Either way, today’s post will help you develop a strategy for tax refunds and avoid some of the more common pitfalls of using them.

Let’s go!

Unnecessary spending

Number one on our list is probably the most nebulous. How do you know if spending is unnecessary? After all, it’s easy to justify most expenses if you want to spend the money badly enough.

The short answer is that identifying wasteful spending is almost impossible without a defined business strategy or a trusted third party such as a financial advisor or CPA.

Still, even the most biased purchasers can identify red flags that should give them pause. These include equipment or tech purchases that don’t have a defined return on investment.

For example, let’s say you own a commercial construction business. You have a relatively new open-air cab tractor that works fine, but you want one with an air-conditioned cab.

You’ll want to know if the extra cost can be retrieved through a tax benefit or by more revenue. If not, it’s unnecessary.

The next one concerns unnecessary spending, but it is so common that it deserves its own category.

Overstocking Inventory

Here’s what happens all too frequently.

A business owner receives a tax windfall and stocks up on inventory. The rationale is that buying extra inventory will result in additional revenue, so using tax return money is a wise investment.

And that may be true, but you’d better be sure.

Otherwise, funds will be tied up for no reason, and you will be stuck managing inventory that isn’t needed. Also, the funds will be completely wasted if the inventory doesn’t move.

Adding insult to injury is the fact your state may levy a tax on inventory.

So, unnecessary spending is a real threat that feeds into the next waste concern.

Poor Financial planning

Without a plan, anything could happen, including scrambling to cover future tax liabilities that went unnoticed because no strategic plan was in place.

With a financial strategic plan, you’ll better understand how to allocate a refund. It could go into growth opportunities or to pay down debt.

While we are on the topic of growth opportunities, let’s examine another tax refund waster.

Missed investment opportunities

One of the biggest wastes of tax refund money is not what you do with it. It is what you don’t do with it.

A perfect example is missing marketing opportunities.

First, you miss out on the chance to grow your business. Second, you miss out on the tax benefits that marketing brings since the majority of marketing expenses are tax deductible.

You might also miss out on other revenue drivers, like investments that could generate passive income for your business.

The Bottom Line

Allocating tax refunds isn’t easy. Businesses usually have plenty of areas that can use the extra cash. The key is to have a plan and a trusted advisor to help you make wise decisions so you don’t have to deal with financial headaches later in the year.